The Fibonacci sequence is one of the most fascinating and useful mathematical tools found both in nature and in the financial world. If you are a beginner and want to understand how to apply this sequence to markets such as cryptocurrencies or stocks, this article is for you.
Who was Leonardo Fibonacci?
Leonardo Fibonacci, also known as Leonardo of Pisa, was an Italian mathematician who lived in the 13th century. He introduced the Hindu-Arabic number system (the numbers we use today) to the West in his work Liber Abaci. During his studies, Fibonacci observed a pattern of growth in various natural situations, such as the reproduction of rabbits or the arrangement of seeds in a sunflower. This pattern became known as the Fibonacci sequence.
What is the Fibonacci sequence?
The sequence is formed like this: each number is the sum of the two previous ones. It starts with 0 and 1 and continues infinitely:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,etc...
Although it seems simple, this sequence has mathematical properties that appear in all sorts of natural phenomena, such as the proportions of shells, galaxies, and even the growth of plants.
The Golden Number (61.8%)
One of the most interesting properties of the Fibonacci sequence is the golden ratio, or golden number, represented by 61.8%. It is calculated by dividing one number in the sequence by the next number (for example, 55 ÷ 89 ≈ 0.618). This ratio also appears in architecture, art, and, as we will see, in financial markets.
How is the Fibonacci sequence used in financial analysis?
In the world of finance, Fibonacci levels are used to predict price movements on asset charts, such as stocks or cryptocurrencies. Here’s how it works:
1. Identify the extremes of the movement:
First, we identify the lowest and highest price of a recent period on the chart.
2. Plot Fibonacci levels:
We use tools available on charting platforms (like TradingView or MT4) to draw Fibonacci levels between these two extremes.
3. Interpret the levels:
The main levels are 23.6%, 38.2%, 50%, 61.8% and 100%.
These levels represent possible points of support (where the price may stop falling) or resistance (where the price may stop rising).
Practical Example: Bitcoin
Imagine that Bitcoin has risen from $30,000 to $50,000. Now, it starts to correct (drop a bit). Using Fibonacci levels, you can predict how far it can fall before resuming its rise:
1. Price difference:
50.000 - 30.000 = 20.000
2. Calculation of levels:
23,6%: 50.000-(20.000x0,236)= 45.280
38,2%: 50.000-(20.000x0,382)= 42.360
50%: 50.000-(20.000x0,5)= 40.000
61,8%: 50.000-(20.000x0,618)=37.640
These values indicate possible support. For example, the price could fall to 42,360 (38.2%) before rising again.
Why do Fibonacci levels work?
Fibonacci levels are widely used by traders, which creates a self-fulfilling effect: many expect reversals at these points, which actually causes the market to react to them. Furthermore, they reflect human psychology and how we react to risk and reward.
How to start using Fibonacci?
1. Choose a charting tool: Platforms like TradingView allow you to plot Fibonacci automatically.
2. Study the charts: Practice identifying the extremes and applying Fibonacci.
3. Combine with other indicators: Like moving averages or RSI, to validate predictions.
4. Avoid impulsive decisions: Use Fibonacci as a support tool, never as a guarantee.
